For many parents, setting money aside for higher education begins before they select a daycare or preschool. It’s no wonder: College is expensive. Whether we’re talking about state schools or Ivy Leagues, a calculator once told me I’d have to save an amount nearly double our mortgage to cover tuition for my young kids (late night pizzas and whatever passes for a textbook in 2023 sold separately).
We have a few thousand bucks in a college account to split between the three kids. Before I’m labeled a terrible parent, let me state my case. The simple truth is that most parents with young kids haven’t addressed more pressing financial needs such as building a cash cushion for emergencies, purchasing life and disability insurance, and paying off any credit card debt. Paying down debt at 18 percent is wiser than setting aside cash in a conservative college fund earning six percent.
Then there’s the matter of retirement. Parents are used to putting their kids’ needs in front of their own. A 2011 study conducted by Allianz Life found nearly half the parents questioned said college and retirement are equally important goals. Most financial advisers don’t see it that way.
Despite retirement being further away than college for most parents, it’s easier to borrow for college than it is to borrow for retirement.
What about crushing student debt? That’s definitely a concern. No parent wants a college-bound teen to have to borrow too much. But what many parents forget is that they will be able to help pay for college with cash flow. Just think about the high cost of childcare and extracurricular activities, or keeping enough food in the fridge to feed a hungry high school athlete. Those costs will ebb and the money can be used to help with college.
Saving up
Say paying for college is a core value of yours and you feel strongly that you need to start planning today, even if it means being less prepared for emergencies or retirement. Then consider one of these three accounts.
Maxing out a Roth IRA is my first choice and how we are planning for college at this time. You can only save $5,500 annually if you are under 50 and an extra $1,000 beyond that if you’re 50 or older. This account is designed for retirement savings, but has flexible rules that let you take the money you contribute out at any time, for any reason. If you need the cash when the first college bill comes, you can tap the account. If you don’t need the funds, use them in retirement or pass the funds to your heirs.
A 529 college savings plan is a simple way to save as little or as much as you want for college. It’s important to note that money in a 529 plan must be used for qualified college expenses. The nice thing about a 529 plan is that grandparents and other relatives can contribute to a 529 plan for your child, which makes for a nice alternative to yet another Lego set. As for selecting a 529 plan, that’s for another column. But in a nutshell, make sure the fees are low and that there are a good set of fund choices. You don’t need a financial adviser to open and purchase a 529 plan. Visit savingforcollege.com for more info.
Consider the Private College 529 plan if you have your heart set on sending your progeny to a small, liberal arts college. The idea behind the plan is that you lock in today’s tuition prices at about 270 colleges nationwide, including seven liberal arts schools in Minnesota. If your child does not end up attending a participating college, the money can be rolled into a traditional 529 plan, or refunded. Like with the traditional 529 plan it’s important to note that this is only a good savings vehicle for the child who is very certain they will end up in college. For more info, visit privatecollege529.com.
Kara McGuire is a personal finance writer and a St. Paul mother of three.
